54 words cause mortgage rates to spike
It took 54 words for Alan Greenspan
to send mortgage rates skyward.
When Greenspan, chairman of the Federal Reserve,
went to Congress Tuesday to deliver his semiannual economic report,
mortgage rates had been tranquil for a week, edging downward slightly.
Minutes after Greenspan opened his mouth, long-term rates blasted
off the launch pad.
The benchmark 30-year fixed-rate mortgage rose 22
basis points to 5.83 percent, according to the Bankrate.com national
survey of large lenders. A basis point is one-hundredth of 1 percentage
point. The mortgages in this week's survey had an average total
of 0.34 discount and origination points. One year ago, the mortgage
index was 6.54 percent.
The rate on the average 30-year mortgage has climbed
more than a half-point in three weeks. The Bankrate.com index on
the 30-year fixed-rate mortgage was 5.31 percent the week of June
25. The last time mortgage rates were higher was the week of April
23, when the average 30-year clocked in at 5.84 percent.
The benchmark 15-year fixed-rate mortgage rose 23
basis points to 5.20 percent. The benchmark 1-year adjustable-rate
mortgage rose 9 basis points to 3.86 percent.
You are welcome to skip this paragraph, but if you're
trying to fall asleep, here are the 54 words that Greenspan uttered,
and which sent markets into a tizzy:
"Indeed, the FOMC devoted considerable attention
to this subject at its June meeting, examining potentially feasible
policy alternatives. However, given the now highly stimulative
stance of monetary and fiscal policy and well-anchored inflation
expectations, the Committee concluded that economic fundamentals
are such that situations requiring special policy actions are
most unlikely to arise."
Bond traders translate the chairman's words as he
speaks them. When he says "FOMC," they know he means the
rate-setting Federal Open Market Committee. For old hands in the
Greenspan-watching trade, it's like viewing a poorly dubbed Godzilla
movie, in which the Japanese actor's lips keep moving long after
the dubbed line in English has ended. Here's what holders of U.S.
Treasuries heard as Greenspan spoke: "The Fed's not going to
buy Treasuries to hold down long-term interest rates. You might
as well sell them now."
So they did. Supply exceeded demand, so Treasuries
prices cratered. Yields move in the opposite direction of prices,
so yields shot up. And that caused long-term mortgage rates to rise,
Speculators had been hanging onto Treasuries, hoping
that the Fed would buy them at a high price, because the Fed had
raised the possibility a few months ago. Early this year, the Fed
floated the notion of buying up Treasuries to drive down interest
rates even further. The Fed would deploy such a tactic only in an
emergency, and some investors bought Treasuries in case such a crisis
came to pass.
When Greenspan pronounced that possibility "most
unlikely," Tuesday's sell-off began.
There's another big reason for Tuesday's rate jump,
says Steve East, chief economist for Friedman, Billings, Ramsey
Group near Washington, D.C.: The Fed predicts rapid economic growth
Tuesday morning, as Greenspan began addressing the
House Financial Services Committee, the Fed released its semiannual
monetary policy report to Congress. In the report, the Fed predicted
that the U.S. economy will grow 3.75 to 4.75 percent in 2004. That's
really strong, East says, "especially that four-and-three-quarter
percent. That's exceptionally strong."
And exceptionally strong economic growth, along with
low interest rates, lower taxes, increased government spending and
huge federal budget deficits, pave the way for a return to inflation.
Add those expectations together and you get higher long-term interest